Crisis-Era Lesson on CMBS Ratings Returns

By Matt Scully and Adam Tempkin of Bloomberg

Low rates for longer bringing back rating problems from last crisis. CMBS under siege.

Global investors are receiving a reminder of the hard lessons learned a decade ago on the issues that come with promising bond ratings. This reminder comes from the $528 billion U.S. commercial-mortgage bond market.

As delinquencies on loans rise, some ratings firms are moving back their grades on bonds tied to properties just a few years after assignment. Kroll Bond Rating Agency Inc. has recently cut some of its grades on a $1 billion bond issued in 2014, citing weakness in Texas loans exposed to energy prices.

The reversals underscore how forces that brought trouble to financial markets before are still percolating through Wall Street today. No one sees the dangers as being nearly as grave as they were during the home mortgage bust. But the same ratings business model used during that period still prevails -- meaning that the banks that put together debt securities still pay for the credit grades, and they can shop around for the firm that will give them the highest ratings under the loosest criteria.